Yellen emphasizes caution as Fed considers raising rates

The Federal Reserve symposium in Jackson Hole, Wyo., attracted people such as European Central Bank President Mario Draghi, who talked with Janet Yellen on Friday.

FROM WIRE REPORTS

Published: 22 August 2014 09:28 PM

Updated: 22 August 2014 09:28 PM

JACKSON HOLE, Wyo. — Federal Reserve Chairwoman Janet Yellen said Friday that the economy was improving but that the Fed was awaiting more evidence about the health of labor markets before deciding when to start raising interest rates.

Yellen’s first keynote speech at the annual conference in the Tetons was mostly an extended explanation of the reasons for the Fed’s caution and an effort to buy time for the Fed to deliberate. She emphasized her view that no single factor, including inflation, could be used to judge the recovery.

“While these assessments have always been imprecise and subject to revision, the task has become especially challenging in the aftermath of the Great Recession,” she said, because of the recession’s “nearly unprecedented” depth and simultaneous changes in the economy, including the aging of the workforce.

Yellen broke little new ground in her speech. She reiterated the Fed’s basic guidance after its July meeting that holding short-term interest rates near zero remained necessary and useful to increase employment. She said that the gap between current conditions and a return to full health remained “significant.”

Acknowledging the uncertainty surrounding that assessment, Yellen said the Fed was prepared to adjust as the economic evidence became clearer, either moving more quickly to raise rates or holding steady even longer. She said the Fed still expected to end the expansion of its bond holdings in October.

Investors generally expect the Fed to start raising interest rates next summer or slightly later, based on asset prices tied to the level of future rates. John Williams, the president of the Federal Reserve Bank of San Francisco and a prominent centrist, told CNBC on Friday that such expectations were a reasonable guess.

Some analysts, however, saw Yellen’s speech — along with the minutes of the Fed’s July meeting, released Wednesday — as evidence that the Fed has become a little more likely to raise rates earlier, if the economy keeps gaining strength.

“We do not believe she has changed her core views, but see the change in tone as a normal evolution based on the fact that the Fed is closer to achieving its dual mandate than at any point in the recovery and has found itself at this stage faster than expected,” Michael Gapen, director of U.S. economic research at Barclays, wrote Friday in a note to clients after Yellen’s speech.

Yellen’s audience Friday included several internal critics of the stimulus campaign, including her host, Esther George, the president of the Federal Reserve Bank of Kansas City, which is sponsoring the conference, and Charles Plosser, president of the Federal Reserve Bank of Philadelphia, who dissented at the last meeting of the Fed’s policymaking committee. Both argue that the Fed has neared the limits of its ability to improve the health of the economy and that persisting in its efforts could loosen the central bank’s control over price inflation.

Yellen’s optimism that Fed policy can increase employment and wages is also challenged by a growing body of economic literature purporting to show that the decline of employment is caused largely by factors that predate the recession and that cannot be addressed by continuing to hold down interest rates.

The economists Stephen Davis, of the University of Chicago, and John Haltiwanger, of the University of Maryland, argued in a paper presented Friday at the conference that employment had declined because the labor market has stagnated in recent decades. Fewer people are leaving or losing jobs, and fewer are taking new ones.

“These results,” they wrote, “suggest the U.S. economy faced serious impediments to high employment rates well before the Great Recession, and that sustained high employment is unlikely to return without restoring labor market fluidity.”

Yellen noted their work in her speech as part of a broad survey of all the things the Fed does not know about the state of the economy — most important, “just how far the economy now stands from the attainment of its maximum employment goal.”

She said this unusually murky situation required the Fed to consider a broad range of economic indicators, and to make difficult judgments in the absence of clear knowledge.

The remarks amounted to a rebuttal of the campaign by House Republicans to pass legislation requiring the Fed to adopt a clear policy rule.

Yellen also sought to play down the importance of inflation as an indicator. Inflation remains below the 2 percent annual pace targeted by the Fed, but Yellen said that should not be seen as clear evidence of slack in labor markets. At the same time, she warned that rising inflation, by itself, would not clearly indicate that the Fed had reached the limits of its stimulus campaign.

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